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By George P. Brockway, originally published February 6, 1989

1989-2-6 The Truth About InflationTitle

1989-2-6 The Truth About Inflation Dollar Sign

THERE ARE supposed to be two kinds of inflation, cost-push and demand-pull.  A benevolent

Providence is supposed to have provided them with the same cure: raising the interest rate or – if you prefer to do things indirectly – restricting the money supply. Last time out (“Bankers Have the Classic COLA,”NL, January 9), we looked at the panacea macro-economically and came up with the heretical conclusion that it caused inflation, rather than cured it. This should have occasioned no surprise, since medicine is a lot older than economics, and it was not until about a hundred years ago that your odds were better if you consulted a doctor than if you didn’t. Neoclassical economics has about caught up with Paracelsus.

The interest-rate panacea is, nevertheless, so solidly fixed in everyone’s pharmacopoeia that we’d better look at it micro-economically to try to discover its supposed merits. I should confess, at the outset, though, that having once met a payroll, as they used to say, I can’t imagine how raising the interest rate is expected to inhibit or prevent businesses from raising prices in response to the increased cost.

Every business must have money, and it therefore has to consider the cost of money, which is interest, whether it is a borrower or not. If it needs to borrow, interest is obviously a cost of doing business. If it is cash rich and doesn’t need to borrow, interest is an opportunity cost. By investing in its own business, it passes up the opportunity of lending its money to someone else and thereby earning the going rate of interest without working; so unless its own business can earn at least that much, it’s not worth continuing.

Interest is thus an inescapable element in doing business, and hardly a trivial one. Moreover, raising the rate not only affects every business, it does so geometrically. An increase in the interest rate is continuously compounded; the push is to an upward slope that becomes steadily steeper. Consequently, if the problem is cost-push inflation, upping the rate makes it worse.

In contrast, an increase in the price of oil is a one-time affair: It pushes most costs (not all, but most) up to a higher plateau, because oil is essential for the contemporary economy. At any given moment – now, for example – a certain quantity of it is used in myriad ways. At another moment – tomorrow, for example – the price may be doubled, thus doubling the economy’s outlay for oil and of course the percentage of total costs devoted to it. Producers, faced with the new cost, will raise their prices. They could maintain their profits if they just covered the increased cost of oil. In all probability, however, they will have been brought up to set their prices as a percentage markup on costs, and workers will have been brought up to expect their wages to be a certain percentage of costs.

Whether or not the new prices are enough to restore the balance among the factors of industry, they pretty quick-1yr each a new level and settle down there. Some industries and companies and workers may make out better than others, especially in the short run, yet by and large business soon goes on about as before. Prices are somewhat higher, to the detriment of people living on fixed incomes and of people who have lent money-and to the benefit of people who have borrowed money. But there is no reason for prices to rise above the new plateau unless the interest rate is tampered with.

When the Organization of Petroleum Exporting Countries (OPEC) made its successful moves, the Federal Reserve Board characteristically reacted in precisely the wrong way. OPEC raised costs for almost all businesses, and they now needed more money to continue. The Reserve Board perversely tightened the money supply, hiking the interest rate. I suppose they thought that by hurting business they would reduce the need for oil and OPEC would then be forced to lower the price. If so, they forgot that we had, as Art Buchwald wrote, encouraged the sheiks to send their sons to Harvard Business School rather than to Bowling Green State to learn basketball. At any rate, OPEC’S response was the standard one of a modem business faced with falling demand. Instead of cutting the price (as a neoclassical economist would have done), they cut production (as a modern businessman would do).

To be sure, the Reserve Board did manage to induce a recession, and that did, after eight years of trying, eventually result in an oil glut and lower oil prices. Just as in Vietnam some of our more thoughtful military leaders occasionally destroyed a village in order to save it, the Reserve Board caused massive unemployment, widespread bankruptcies, a growing Federal deficit, disaster in Latin America and the Third World, and a loss of much of our overseas business – all in the effort to control the price of oil. It was not a rational trade-off; and micro-economically the fact remains that raising the cost of any of the factors of production, of which interest is one, is not the way to inhibit cost-push inflation.

Demand-pull inflation is described by the popular cliché of too much money chasing too few goods. What is in the back of everyone’s mind is either an auction where millions of dollars are unexpectedly bid for a painting, or the hyperinflation that occurred in Weimar Germany, or the bread riots of pre-Revolutionary France. Briefly let us note that modern business is nothing like an auction, that hyperinflation occurs only when a nation has un-payable debts denominated in a foreign currency, and that the failure of the bread supply caused, not general inflation, but a deflation of all other prices as desperate people sold whatever they could at distress prices in order to pay for bread.

Putting to one side the probability that there is no such thing as demand pull inflation, we may doubt whether raising the interest rate will prevent too much money from chasing too few goods. A high interest rate no doubt chills the ardor of borrowers and thus may be thought to hold down the amount of money in circulation. Not all borrowers, however, are chilled equally. Speculators find high rates stimulating. Of course, money that goes into speculating doesn’t go into consuming; it chases paper, not goods; as far as consumption (or production, for that matter) is concerned, it might as well not exist.

Consumers, for reasons thought important by Professor Franco Modigliani and others, are said to try to maintain their accustomed or desired standard of living. They will shoulder heavy debts at usurious rates to do so. Hence their readiness to assume mortgages at more than double the maximum legal interest rate of a few years ago; hence the cavalier expansion of credit-card borrowing; and hence the failure of high interest rates to impede the chase for goods. In fact, because high interest rates have proved acceptable to consumers, the consumer loan business, once left to frowned-upon outsiders, has become attractive to banks-with the paradoxical probability that high rates have resulted in more money chasing goods, not less.

The famed bottom line, on the other hand, forces a more circumspect demeanor on businesses; few of them find it profitable to expand when the cost of financing is well up in the double-digit range. Many find it impossible to go on (right now, in this supposedly prosperous time, corporations are going bankrupt at a greater rate than at any time since the Great Depression). So high interest rates, while having only a minor effect on demand, have a major effect on supply. Whether or not there is more money in the chase, there are fewer goods in the running. To put it more generally, there are fewer goods than there might have been otherwise.

OUR HALF-CENTURY-LONG preoccupation with inflation is a sign of a profound confusion of American-even of global mind and will. Since World War II, inflation has been regarded as a pandemic disease, and a panacea has been sought. But social ills are specific, not universal, and corrective policies must be similarly specific.

If inflation were all prices going up together, a few people would be befuddled, but no one would be hurt much. As early as David Hume it was recognized that moderately rising prices stimulate the vital juices of entrepreneurs. As recently as the current “prosperity” it has been evident that business can readily accommodate itself to pretty steep inflation if it is fairly steady.

The trouble is that even moderately rising prices can be devastating to people living on fixed incomes, because they have no way of protecting themselves. This is a specific ill (there are others). Specific treatments are available, and some of them have been successfully applied. In 1966 Medicare began to protect the aged from one of the most crushing burdens of old age, and at the same time to provide millions with health care that otherwise would have been denied them. Since 1972 the Social Security COLAS have done much to prevent many of the retired from falling into poverty.

Some now say that the aged have it too good. This is a dubious proposition, but it is not to the point. The point is that the mentioned policies have had an effect. A specific ill was perceived, a specific treatment was devised, specific cures were effected, the cures may be judged, and specific improvements in them can be made. In contrast, the conventional theory of inflation that regards it as a pandemic ailment can propose only the panacea of a growing underclass of the chronically unemployed, and a narrowing overclass of those who have been able to make the Bankers’ COLA work for them.

Because interest payments are made pursuant to contract and continue years, often decades, into the future, the heavy hand of the Bankers’ COLA will be upon us, no matter what we do, for years to come. In the meantime our urgent task is to free ourselves, our politicians and our bankers from thralldom to the most dismal view of this dismal science.

The New Leader

By George P. Brockway, originally published December 29, 1987

1987-12-30 Medical Care and Pauperization Title

HAVING recently seen the insides of more hospitals than I wanted, and having accordingly had bills from more medical specialists than I dreamed existed, I have a more intimate awareness of the Medigap than I had when I wrote my April 20 column on the subject. Hence these reflections on three related problems.

First, I have an unhappy impression that some of the specialists were unnecessary, and that some of the things the necessary ones charged for were unnecessary. A couple seemed to drop around for two or three minutes of bed side chitchat long after the diagnosis had been made and their specialty’s noninvolvement confirmed.

One of the latter, a nice fellow with an impressive beard, sent me a bill for 12 such visits at $65 a pop. Medicare will ultimately pay somewhat less than one-half of that, and a group policy I have will probably pick up 80 per cent of the balance; so I’m not hurting too badly. But every medical expense, whether legitimate or not, goes to swell the national medical bill and thus the medical insurance bill. Medicare then raises its rates or reduces its benefits, and the private insurers do the same.

Now, my impression that this fellow with the beard was riding the gravy train is only an impression. I don’t know, and I have no satisfactory way of finding out. Besides, when I’m a patient I want to have everything possible going for me. So I’m not going to inquire whether bills are padded, and I’m not going to shop around (as the Reagan Administration thinks I should) to get the cheapest rates.

You might think my GP blameworthy for sending in all those specialists. Yet put yourself in his shoes. Suppose he doesn’t call in all the specialists and suppose they don’t order all the blood tests and X-rays and CAT scans and MRIs. Then suppose I wind up with a serious ailment that might have been avoided. As I keep telling you, I’m a mild-mannered man and I’d probably not sue, but plenty of others would. So to guard against a malpractice suit, the GP orders every specialist in sight. Of course, peer review might be able to do something about this problem, and for all I know it does; but I’m sure it’s not easy.

Insurance companies keep trying to get legislatures to limit the amount of damages that can be collected, or to outlaw claims for pain and suffering. This seems to me an unreasonable solution. Malpractice does occur, and accidents do occur. Should I lose the use of my right hand because of an incompetent or accidental slip of a surgeon’s knife, I’d not be “made whole,” as the lawyers say, by a free night in the hospital (less legal fees). If the doctors can’t afford high malpractice premiums, and the insurance companies can’t afford to lower them, I can’t see any course short of turning the whole thing over to the government. As Charles O. Gregory argued in a wise and witty book entitled Torts and Retorts, all sorts of personal injury claims (torts) should be the responsibility of the State.

A leading theme in the history of Western law has been the gradual transfer to the State of rights and duties that in more primitive civilizations were private. In ancient Greece, triremes were built not at State expense but at the expense of rich men chosen by lot for the honor. In late medieval Italy, all families of any consequence maintained private militia, like the followers of the Montagues and the Capulets, and competed in building lofty military towers that would enable them to overawe their neighbors. San Gimignano, a town of no great size, had 70 such towers, 14 of which still stand. (A civilizing step was the passage of a municipal law-a zoning ordinance- prohibiting towers beyond a certain height.) For centuries, the detection and punishment of crime was solely the obligation of the injured. Fairly late, the impersonal judgment of God was rendered via trial by battle and trial by ordeal. Secular public enforcement of criminal law is a relatively new idea.

In the same way, health care is gradually shifting its ground. The notion of fee for service is already being compromised by the movement to shame doctors into accepting approved fees. It’s not too much to hope that we may eventually have the sense to adopt the better European systems.

A step in this direction has been taken by Massachusetts. Cynics say it is a calculated maneuver in Governor Michael S. Dukakis‘ play for the Democratic Presidential nomination. Giving the Duke the benefit of the doubt, I still think his scheme is an example of what Samuel Johnson said about good intentions and the road to hell.

There are close to 6 million residents of Massachusetts and almost 700,000 of them have no health insurance. I must admit I’m astonished that so few are not covered. About two-thirds of the uninsured are employed or are dependents of people who are employed. The Governor proposes to narrow the gap by requiring all employers to insure their employees, with the state picking up the relatively small balance. Clearly what makes the scheme attractive is Massachusetts’ present unemployment rate, said to be less than 2 per cent, since the drain on the Commonwealth fisc won’t require dramatically higher taxes. Before the days of high-tech, when Massachusetts’ unemployment rate was one of the highest in the country, the scheme wouldn’t have seemed so painless.

That brings us to the second problem. Whatever the condition of business, universal employer-financed health insurance has a damping effect on employment. Once additional employees cost you several hundred dollars apiece beyond their pay, you’re not so cavalier about hiring them. (Social Security taxes, right now, work to discourage employers in this way; they’re also heavily regressive on employees.)

Just because we’ve stumbled along this half century with a far from perfect Social Security system doesn’t mean that more of the same won’t hurt us. In The Next Left Michael Harrington argues persuasively that piling payroll taxes on payroll taxes was largely responsible for the high unemployment that contributed to the failure of Socialist President Francois Mitterrand‘s program in France. It could happen here.

Aside from Workmen’s Compensation, medical insurance has no special connection with employment. In a more civilized nation, all such protection would be a national responsibility, met out of the general revenue without the intervention of insurance companies, private or public. The tax bill might then seem higher, but the drain on the common wealth would be very much less, and the salutary effect on the general welfare would be very much greater.

For this reason I’m not passionately interested in HR 2470, the bill the House has passed limiting some catastrophic medical expenses to $2,000 a year. And speaking personally, although our medical bills will be many times $2,000 this year, HR 2470 will not, as I understand it, benefit us in the slightest. The insurance company that wrote the group policy I’ve mentioned will get all the benefit, and we will have to pay maybe $1,160 a year in increased Medicare premiums. The insurance companies that will be hit are the TV bandits I described here last April-if their bemused subscribers have the sense to drop them as utterly useless as well as scandalously expensive.

Those committed to laissez-faire insurance complain that HR 2470 provides for a sliding scale of premiums. Since this tops out at an Adjusted Gross Income of $14,166, my objection is not that it is progressive, but that it is not progressive enough. It is not reasonable for anyone with an AGI of$14,166 to be put in the same class with David Rockefeller, or even with me.

THE THIRD medical problem is the hundreds of thousands soon to be tens of millions- of senior citizens who can no longer take care of themselves. In the good old days, before there were such things as senior citizens, the old folks moved in with the young folks, or possibly had a spinster daughter move in with them. In either case, the elders were able to give their adult offspring the benefit of their long accumulated wisdom, driving the offspring to spring up the wall. In many a home, something approaching The Tragedy of King Lear was re-enacted. Yet both generations took some comfort in the fact that the elders were not a public charge. Where, for lack of family support, they were the public poor house took over.

All this has changed, for reasons we’re all familiar with: Family ties are looser today; individual pride is stronger; the expected life span is very much longer; bottom-line-conscious employers are quick to replace high-priced and slowed down old hands with eager beginners; and medical research has rendered many diseases incapacitating rather than killing.

These changes lead to the matter of nursing homes and how to pay for them. They are not paid for by Medicare or by most commercial health insurance. They are paid for by Medicaid, but only at the expense of near-pauperization. The rules are complicated, and complicated revisions are daily suggested; yet it remains at best a disheartening and dishonoring process, especially for the middle class that has worked hard for independence. What’s to do about it?

Actually a simple solution suggests itself. Instead of forcing pauperization before entry into a nursing home, apply the force at the end. That is, if it is reasonable for the government to exact as full payment as possible for nursing home care, let it do so from the patients’ estates after death, not from their reserves.

They would thus be able to retain the hope, however slim, of being able one day to take care of themselves again, outside the confines of the nursing home. Moreover, they would be spared the shame of pauperizing both themselves and their spouses, or the alternative heart-wrench of unwanted divorce in order to protect the independence of the non-institutionalized partner.

Obviously it would be difficult to devise regulations that would forestall the temptation to diddle the government in one way or another. But the same difficulty obtains under the present system. Obviously, too, it would cost the government something to have to wait for its money. On the other hand, the money, when the government finally got it, would tend to be greater, for there would be no need for most of the exceptions that now limit Medicaid’s claim on a patient’s means.

Finally, some will object that my plan would deprive offspring of their rightful inheritance. To them I reply: (1) The heirs of patients pauperized as a condition of Medicaid inherit little or nothing as it is; and (2) I’m not one to do battle for the right of inheritance, anyhow. In fact, I join economists as various as Hayek and Keynes in thinking the right might well be abolished. But that is another question.

The New Leader

By George P. Brockway, originally published April 20, 1987

 

1987-4-20 Profiting from the Medigap Title

HAVING BEEN house-bound for a few days recently, I watched a lot of daytime TV. It’s something everyone should do occasionally-say, every five or 10 years. It mortifies the brain. Only someone like Marvin Kitman, with unshakable courage and emotional stability, could possibly do it on a regular basis.

Of course, you learn things. You learn that 19 minutes into the program, Perry Mason or his client will knock on a door, be astonished to find it unlocked or ajar, and stumble over a body. This moment, which Aristotle might have called the anagnorisis, comes as a relief, because the previous 18 minutes (including commercials) have been devoted to setting the California scene and peopling it with a disagreeable assortment of land speculators, oil wildcatters, superannuated “investors,” and movie hopefuls down on their luck. The crowd could easily pass for a reunion of the President’s[1] most trusted advisers and supporters.

After a while, if you don’t have remote control to protect yourself, the commercials begin to impinge on your consciousness. You become aware, first, that most of them are hard sell: “Call this toll- free number now. Have your credit card ready.” Then you notice that certain sorts of business seem to find TV promotion particularly effective. The sort that attracted my attention (it is, after all, directed at people like me) was insurance, especially Medicare supplements.

In these insurance commercials an oily or folksy “personality,” usually from the entertainment world, earnestly recites some scary figures on what Medicare doesn’t cover. This is known in the trade as the Medigap, and we’ll be hearing a lot about it as the national debate over catastrophic medical expense [2] continues. I must confess that most of these personalities (except for Roger Staubach) seem to have achieved eminence unbeknownst to me, but they do read their lines well. One of them so impressed me with his concern for my welfare that I decided to call the toll-free number (“The information is free, and so is the call”). Having called one, I then called them all.

Eliminating duplications (different entertainers, different phone numbers, but same outfit), I made six calls. Several were to Valley Forge, Pennsylvania companies. As Samuel Johnson told us, patriotism has its uses, even if it is only subliminal. The others were likewise to Pennsylvania or to Delaware companies-a curious concentration that suggests something about those states’ insurance regulations. The pleasant young women who answered my calls promised information in the mail in one to six weeks, and by golly they delivered. Follow-ups come trooping daily, but as promised, no salesman has visited me (at least not yet), and there has been only one telephone pitch.

The mailing pieces are wonderfully elaborate. In accordance with received direct-mail doctrine (I once dabbled in that black art), each has a long letter signed by the TV personality recapitulating his sales pitch, addressed to me by a computer (one of which knows me well enough to use my first name). In addition there are several separate circulars (the theory is that one of them may catch your eye as you fumble to pick them up and stuff them in the wastebasket).Some are printed in four colors and gold, some merely on colored paper. They describe the great risks you run by not having the coverage set forth in the various schemes being offered, and give an ecstatic description of the sponsoring company, together with its evaluation in Best’s Insurance Reports and an emotional endorsement from “Mrs. P.M.K., Lawrence, Kans.” A formal application blank that looks like a stock certificate, a plastic identification card for your wallet, and a return envelope marked “RUSH” in big red letters complete the pricey packet.

Although the programs vary slightly from company to company, the sales pitches invariably emphasize the rising cost of hospital care and the declining percentage of it covered by Medicare.

The hospitalization Medigap runs from a deductible of $520 to a total of $20,020 after 150 days of confinement. That’s pretty scary, but the insurance company will pay every cent, plus all “Medicare allowable” hospital expenses for one extra year. That’s pretty comforting, until “Medicare allowable” inadvertently reminds you the Medigap is by no means closed when you buy one of these policies.

But look you: The average hospital stay for senior citizens is only 8-9 days, with stays of 150 days very rare indeed. Further, in very small type the circular hedges: “Sickness, injury, or any physical condition for which you received medical advice or medical treatment during the six months prior to your Certificate’s

Effective Date will not be covered until six months after such date. Also, any illness, treatment, or medical conditions due to an act of war (whether declared or undeclared), and any services or facilities not covered by Medicare, are not covered.”

Noting that nursing homes are thus excluded in war or peace, let’s go on to examine that hospital stay. One company offers a “deluxe” and a “basic” plan. The only difference between the two is that the deluxe covers the initial $520 deductible. The difference in cost to you is $18 a month, or $216 a year. The company clearly figures the deluxe plan will at the minimum earn back the deductible exposure if the average policyholder goes to the hospital no more than once every 29-30 months-a very safe bet once you stop to think about it. The $520 deductible sounds formidable when mouthed by a TV personality and it certainly is a snide provision for a government program that pretends to cover the citizens of the republic-yet $216 a year is a truly formidable price to pay for what is in effect $304 worth of insurance.

As I’ve mentioned, Best’s Insurance Reports is often quoted to show how reliable the advertiser is. An exceptionally profitable company is obviously exceptionally reliable; it will be able to pay all probable claims against it. But there is an irony here: A company that is exceptionally profitable is probably charging exceptionally high premiums. Best’s reports this side of the business, too. The relevant statistic is the loss ratio the total of claims paid divided by premiums charged.

Among the TV advertisers I checked on, the worst had a loss ratio of 46.4 per cent, and this would have been even lower if allowance had been made for the profits the company makes by investing its float. Another’s loss ratio was 47.5 per cent, and the rest were in the low 50s. In contrast, the plan of the American Association of Retired Persons (AARP) has a loss ratio in the upper 70s. Yet as any AARP member knows, their plan carries a considerable advertising load too. AARP, Blue Cross and Blue Shield, and the similarly effective extensions of company group policies can’t quite dispense with selling expenses.

Now, everyone has tales to tell of Medicare delays and foul-ups, but at its bureaucratic worst it is far more cost-effective in rendering service than the best of the plans sold by the insurance industry. Its loss ratio is in the high 90s.

The reasons for Medicare’s relative efficiency are not far to seek: (1) Probably the most important is that it has no advertising or sales overhead; (2) next most important, no profits have to be made for stockholders; (3) it requires no cash flow to cover high executive salaries (the top government salary  wouldn’t tempt an assistant vice president from a commercial company); and (4) it can operate with little or no reserve, because the government won’t let it go bankrupt even if actuarial expectations should prove disastrously wrong. (The presumed need for a reserve is at the root of the wails that Medicare rates must be raised. A tortuous argument may be made for a Social Security reserve; but with Medicare, both premiums and payouts are current, and the margin of actuarial error is very small. There’s no necessity for me to pay now for service I may need 10 years hence, since I’ll be paying as long as I live.)

CON ARTISTS separate the unwary from their money in many ways. They sell junk jewelry on TV; why shouldn’t they sell junk health insurance?

The difference is that no one has to have jewelry, whether junk or not. No one has to have sugar-free chewing gum, or the latest in soft drinks, or a set of picture books about ghosts, witches and other supernatural epiphanies. Consequently, in all these cases-indeed, in the case of most products that enlist the hearts and minds of advertising apparatchiks- the price of the product is of little social importance. It is even of little personal importance, as witness the fact that proprietary drugs far outsell their less expensive generic equivalents.

Health insurance is something no one can do without. We all get it somehow. We don’t necessarily buy it, and it’s safe to say that no one buys all that might be needed (a friend of mine was told by an agent that “adequate” coverage would cost $1,800 a year for him and slightly less for his wife). If we don’t buy it, where does it come from? We’re then self-insurers, of course. We run the risk ourselves. This may be by necessity or design. We may not be able to afford the premiums, or we may be able to pay cash for the most esoteric medical attention money can buy. But one way or another, bad or failing health is a risk we must and do face.

Some kind of coverage being vital and inevitable, health insurance is no longer in the same class with soft drinks and picture books. The risks will be covered. The question is, how well?

In the United States today they are not covered well. In his new book The Next Left, Michael Harrington tells us that the United States devoted a higher percentage of its gross domestic product to health care than any other industrialized nation, yet has the least satisfactory health service. While this is partly a consequence of our paying doctors on a fee-for-service basis, it is also a consequence of our turning so much of our health insurance over to profit-oriented companies, and leaving so much of the rest to the vagaries of self-insurance.

We know that competitive enterprise is supposed to develop better products at better prices, and we see this actually happening. But in the health insurance “industry” what we mainly see is the development of more imaginative ways to sell a “product” that should, in a democratic society, be uniformly available to all. That is a fact to keep in mind as the Administration intensifies its effort to turn any improvement in Medicare coverage over to the insurance “industry.”

The New Leader


[1] Editor’s note: President Reagan was originally a movie actor

[2] Editor’s note: this phrase is italicized to remind the reader that it was written 25 years ago and describes in the same terms the challenges of funding medical costs that are used in 2012.

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